Business-to-business models offer timely financial assistance to their clients. The credit advance can last 30 to 90 days, depending on the invoice presented. Doing business without constant cash flow can be distressing. Many firms would have to close down as they wait for the invoices to mature.
Enter invoice factoring. Invoice factoring is a short-term financing alternative that helps businesses to run smoothly. Invoice factoring is available for companies dealing with goods or rendering services. For instance, factoring for staffing company caters to hiring agencies.
What is invoice factoring?
Invoice is a rapidly fast financing solution that helps a business access financing services tied to outstanding customer invoices.
Traditional lending institutions do not lend money to startup businesses with poor or no credit history. However, a factoring company (factor) can advance business money based on the invoices submitted. The factor does not consider your credit history. Consequently, new business owners can ensure constant income throughout.
Invoice factoring is also known as account receivable financing. Invoice factoring allows you to enjoy continuous cash flow before your invoice can materialize.
How does invoice factoring work?
There are three parties involved in an invoice factoring arrangement. These are the business rendering goods or services, your customer and the invoice factoring company, also known as the factor.
Invoice factoring is a straightforward process that avails money to businesses in hours. Here are the steps to accessing money from an invoice factoring company:
- Step 1
A business register interest in accessing cash from a factor, the factor reviews the company’s eligibility and does its due diligence ensuring the business is legit. Then the business can make an application stating the amount you can borrow.
- Step 2
The business then can deliver goods and services to the customer and offer them credit terms. Later, the business sends a copy of the agreement to the factor.
- Step 3
The factor will release money up to 85% of your invoice value. This is often a same-day transaction and deposit.
- Step 4
When your customer payment date materializes, they pay to the factor, who recovers the payment. This means that the factor owns the receivable. Consequently, they deduct a reasonable service charge and deposit the balance into your account.
Invoice factoring process in a nutshell
- Application and approval
- Submit payment invoices
- Factor verifies the validity of the debtor’s invoice
- Funding finalized within24 hours
- The debtor honors the invoice
- Factors pay the balance to the business minus the service charge as agreed
Why is factoring a viable financing option for small businesses?
Invoice factoring is a convenient financing option for startups and small businesses. Often, beginners have challenges accessing credit from lending institutions. Further, accessing immediate cash can be challenging if all your clients pay using invoices.
Here are the leading benefits of invoice financing
- Maximizes cash flow
Invoice financing ensures there’s constant cash flow in a business. The service is a lifesaver when you have slow-paying clients. Clients are the lifeline of any business because their loyalty sustains you in the market. Therefore, advancing their credit keeps them coming to your instead of going to your competitors. Invoice factoring tis the best alternative to giving blind credit. Consequently, you keep your customers and have cash when you need it.
- Quick financing solution
Invoice factoring operates on same-day transactions. Invoice factoring avail credit when you needed, especially when you get a seasonal business opportunity. You can take on large projects that would otherwise have been challenging to pursue.
- Allows growth and expansion
Inadequate capital is one of the leading reasons many businesses slow their growth and expansion. You cannot add to your stock or leverage business opportunities without sufficient capital. Invoice factoring helps you surpass the cash crunch, allowing you to pursue growth-related goals.
- Sorts out short-term financial hurdles
Invoice factoring avails cash to your business so you can pay your employees on time, grow your business accounts, cover operating costs, pay bills on time and take more time on your core business.
Take away
Invoice factoring is one of the leading financing options available for small businesses and startups. It ensures constant cash flow in the business so you can concentrate on expanding your brand and keeping your customers happy.
